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Sugar plummets, but mills still spending big

As the sun sets on another season for the Tableland mill, MSF Sugar's vision is for increased capacity and efficiency

Charlie McKillop

The end of the Australian harvest season has coincided with one of the most dramatic plunges in the sugar price seen this year.

Earlier this week, the price of sugar on the New York futures hit 15.88 US cents a pound for the March 2014 contract after free falling 30 points in the previous session, although steadied again overnight to be trading back above 16 US cents a pound.

But, Dominic Nolan, from the Australian Sugar Millers Council says as the industry looks to even larger production next year, the global oversupply and depressed outlook for sugar prices has not affected confidence.

"They are five, 10, even 20-year investment horizons and payback periods so certainly as an industry, we've been here for over 100 years and we're expecting to be here for that long again at least," he said.

"The fundamentals of the world sugar market are strong, there is an expectation that toward the end of next year that we'll be moving pretty much into a balanced world supply and demand situation

"So fingers crossed prices might respond accordingly but it's a pretty fickle thing, the market, and we'll just have to keep watching it."

The Thai-owned MSF Sugar hasn't wasted any time signalling its intentions, announcing a $46 million capital works program after record crops at two of its three far northern mills.

CEO Mike Barry says $8 million will be spent increasing capacity at South Johnstone mill, near Innisfail, as a first instalment on a five-year $65 million program earmarked for the ageing mill.

The balance will be spent on factory upgrades at Mulgrave Central (Gordonvale) and Atherton Tableland, where the last of the district's largest crop will be crushed by the weekend.

Mr Barry says the falling fortunes of the sugar price is not weighing on the minds of MSF executives, or its owner, Mitr Pohl.

"We've got big investment plans, we want to continue to grow, continue to make our mills and the growing sector more efficient so yeah, quite a big investment program ahead of us."

"Our view is the sugar price is probably for quite some time going to stay around where it's at," he said.

"The real prize in this game is to be the low-cost competitor - that's about volume, it's about efficiency, it's about reliability.

"They're the elements that we can control so we've got to make sure that we're the best at what we do.

"Now, some of that does require investment, some of that's catch-up investment at some of our mills but trying to pick the sugar price and hope the sugar price is going to improve to justify investment, that's not the way we look at it."

It's been a tumultuous year for MSF Sugar, a year in which the company lost more than 700,000 tons of cane supply as growers signed a deal with rival miller, Mackay Sugar.

Mr Barry remains unrepentant about the rift over marketing which led to the dramatic split with his growers, saying MSF has now delivered "exactly what we said we were going to do".

In other words, a raw sugar supply agreement with the growers' preferred marketer, Queensland Sugar Limited, and significant upgrades to the factories.

The real prize in this game is to be the low-cost competitor - that's about volume, it's about efficiency, it's about reliability. We've got big investment plans.

Mike Barry, CEO of MSF Sugar

With $40 million already spent on the Tableland mill in the past 18 months, MSF knows it could possibly be at risk of owning the best performing yet most under-utilised sugar factory in the country.

But Mr Barry has ruled out any possibility of a joint venture between MSF and Mackay Sugar which would see some or all of the cane remain on the Tableland in the next five years.

"Our focus is on the next stage, doubling the size of the Tableland mill and putting on a further back-end expansion, that's where we want to go.

"It's going to be a big gap, not much we can do about it, we can only work as hard as we can to fill the mill back up," he said.

Sugar analyst, Tom McNeill, says the fall in the international price is due to yet another year where supply exceeds demand.

"The Brazilian crop has had a better tail this year than most people anticipated and it's coming in with a new record cane tonnage," he said.

"We are just moving into the timing when Asia's crops are starting to be harvested; Thailand has a new, record crop, the Indian crop looks very good, unexpectedly good in fact, Pakistan, China and Vietnam are all having good crops."

Mr McNeill says good prices in the past few years have been an incentive to increase production, resulting in oversupply globally.

He says the fall in the value of the Australian dollar, to 88.5 US cents, has helped protect the returns for farmers here.

"It's a big factor in keeping Aussie dollar values per tonne above water, so for 2014-15 returns are still around $410 to $420," he said.

"Thankfully we are no longer at 105 or 110cents to the US dollar, or we would be looking at returns of just $360 or $370 a tonne which is probably below the cost of production."